Altria Group: A Smokin’ Dividend

Is a dividend increase ahead for Altria (MO)? Wells Fargo analyst Bonnie Herzog says a 9% hike is “around the corner,” offering it up as another reason to buy the cigarette maker on the stock’s recent dip.

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The other reasons? A pending FDA decision on a new products and speculation of a possible deal with Philip Morris International (PM).

We expect MO’s Board of Directors to approve a quarterly dividend increase on 8/24 of 9.0% to $0.66 per share, implying a very attractive yield of 4.0% and an annualized payout ratio of 81% (up from 75% a/o 2Q17), bringing it in-line with the company’s 80% target. We believe the recent dramatic pullback in MO’s stock makes a compelling argument for the Board to accelerate the return of cash to shareholders with its next dividend increase acting as a positive catalyst for the stock. Further, we see additional n.t. positive catalysts ahead including: (1) the potential that PM acquires MO as reported by Reuters without mgmt. comment (70% probability); (2) MO’s Investor Day on November 2nd; and (3) FDA approval to commercialize iQOS we think as early as late 2017/early 2018). From a FCF/leverage standpoint, we believe MO is in good shape with a sufficient financial “cushion” to support a 9% dividend increase this year and in 2018. Bottom line – Therefore, we continue to encourage investors to build larger positions in MO as a 9% div increase will enable l.t. investors to pocket an attractive 4% yield and essentially get “paid to wait” while the FDA overhang persists. We reiterate our Outperform rating and $80 price target on MO, which implies a 26.5% total return in the next 12 months.

Late last month, the FDA announced a new stance on nicotine, which sent tobacco stocks spiraling. The agency now wants to reduce the chemical’s presence in cigarettes to make them less addictive. Altria’s stock price has tanked, despite an upgrade from RBC Capital Markets. As of Thursday’s closing price of $64.77, Altria has fallen more than 12% since July 27.

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Altria Group: A Smokin’ Dividend

Is a dividend increase ahead for Altria (MO)? Wells Fargo analyst Bonnie Herzog says a 9% hike is “around the corner,” offering it up as another reason to buy the cigarette maker on the stock’s recent dip.

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